Birthday for capital gains tax could mean a change in direction

It may surprise you that on Sunday 20 September 2015, CGT turned 30 years old.

Despite the name, there is no such thing as a capital gains tax per se; the tax law works by dealing with capital gains under the Income Tax Assessment Act, along with ordinary income.

Borne out of the 1985 Draft White Paper produced by the Hawke/Keating Government, the taxation of capital gains was introduced primarily for equity reasons and to improve economic efficiency. The lack of a tax on capital gains meant the economy was out of balance, with investment decisions distorted toward capital appreciating assets.

From modest beginnings, the taxation of capital gains is projected to make up just over 3%[1] of total taxation receipts in 2015-2016. Originally estimated to collect $5 million in 1987-1988, total collections in the 2015-2016 budget estimates were expected to be $11.5 billion. A comparatively small amount when considered against estimated collections from GST of $57.3 billion and company tax of $68.2 billion.

Over time, it has been tweaked and tinkered with, expanded and amended, and subject to High Court examination. From its introduction in 1985, gains were computed after allowing for inflation based indexation, meaning only real gains were subject to taxation. From 1999, a CGT discount was introduced in place of the indexation adjustment. The discount, along with other CGT recommendations, was envisaged to invigorate the Australian equities market, which was perceived to be suffering from a ’lock-in’ effect due to the existing CGT settings.

Now in 2015 with the Tax White Paper process, the capital gains tax regime is being reviewed again. Despite the then Treasurer indicating in April 2015 he was reluctant to interfere with the capital gains tax regime as it may stifle the flow of capital into high-risk but innovative start-ups, there is debate about the need to reconsider the appropriateness of the CGT discount, which is 50% for individuals and 33.3% for superannuation funds.

CGT has been named as one of the taxation settings influencing the heating up of the residential property market. Criticised for its inconsistency of application across different entity structures, CGT may yet again be adjusted next year, as the Federal Government completes the white paper process. And that change is unlikely to be in the form of a present to taxpayers.

An account director in Deloitte's Tax Insights & Policy Group, Peta has more than 25 years experience in the Taxation arena. Her current role includes writing/reviewing our taxation publications and thought leadership, tax related practice projects, and more.